Political Risk

This coming Sunday sees a presidential election in France and parliamentary elections in Greece. In the case of France it looks probable that we are to lose one half of the “Merkozy” double act that has presided over the eurozone crisis so far. When it comes to Greece the only certainty is that caretaker prime minister Lucas Papademos will no longer be in charge. Would a left wing President of France mean the abandonment of fiscal consolidation? And could popular discontent in Greece bring about demands for a renegotiation of the country’s bailout agreement, with all the chaos that could entail?

The risk from France would seem to be the lesser of the two. M Hollande, the socialist frontrunner, has certainly used the austerity issue as a stick for beating his rival. He has also threatened to refuse to ratify the European “fiscal compact” agreed at one of last year’s many emergency summits unless various measures are taken to boost growth. Crucially, however, he is committed to a remarkably similar domestic fiscal path to that envisaged by M Sarkozy. Both men would see France’s budget deficit reduce to 3% of GDP by 2013 (from an expected 4.4% this year), and both want to balance the budget thereafter – though M Hollande would see this goal reached only in 2017, a whole year later than his opponent, and favours a 50:50 split between tax increases and spending cuts, as distinct from the radically different 35:65 split on the table at present.

At the European level, even the threat to scupper the fiscal compact would depend on failure to agree measures such as those in M Hollande’s four point plan for growth: eurozone-wide bonds for infrastructure projects, more lending by the European Investment Bank, a financial transactions tax and more efficient use of EU structural funds.

Now the idea of using EIB lending to stimulate growth appeared as far back as last July’s EU agreement over Greece, so this could be a serious runner. Chancellor Merkel has already indicated that the next EU summit, in June, will have a growth agenda. If M Hollande manages to secure backing for even one or two of his proposed ideas he would be able to present this as a transformative victory for a more pro-growth politics across the Continent – especially if more EU money for France should happen to be an incidental consequence of the plan. Having already accomplished his most important task – getting elected – his need to tear up the fiscal agreement would be greatly lessened. (This is certainly the way markets are betting, with French bond yields showing no signs of panic.)

The Greek situation is altogether more unpredictable. The electoral system is a model of proportional representation in action. Like the Spartan force at Thermopylae, the legislature has 300 members. 250 of these are allocated proportionately, with a threshold of 3% necessary to win the minimum 8 seats in parliament. The remaining 50 are awarded to the party with the most votes. That will almost certainly mean the centre-right New Democracy party of Antonis Samaras; with poll numbers in the low 20s, ND is several points clear of its nearest rival, the centre-left PASOK, at the head of a very divided field.

Now Mr Samaras has already committed himself, in writing, to Greece’s bailout terms, on the insistence of his country’s creditors. He intends to govern with the aid of PASOK in a continuation of the coalition which has been in place since the fall of George Papandreou last November. But the problem is that the main parties are so unpopular that even with that 50 seat bonus they might still struggle to achieve a majority. The communists, the other leftist parties and most of the nationalist right is against the austerity programme.

In other words, there is a more obvious worst case outcome for Greece. While the communists, nationalists etc. are highly unlikely to join a formal coalition against the political mainstream, they could easily unite to oppose specific votes / budgetary measures, holding out the prospect of fresh elections and constant political uncertainty into the bargain. Anything short of a clear majority for the main parties, therefore, could spell more market drama.

There are of course many observers who would like to see the country’s present rulers out of office, democracy restored, Greece out of the euro, austerity ended and the EU itself given an enormous bloody nose. Despite everything, however, while the most recent polls show that 60% of the electorate oppose an ND / PASOK coalition, 77% “would like the next government to do everything possible for Greece to remain in the euro area”. Whatever else it might be, the political situation in Greece is not that straightforward.

In conclusion, then, the French election over the weekend will be interesting. But the Greek elections could be important.